Don't worry, it'll all blow over; nothing to see here. That seems to be the Government's stance on more or less everything these days, and has been very much the message from Business Secretary Kwasi Kwarteng this week on the energy crisis.
On one level, he's sort of right. There is indeed little chance of the lights going out, or domestic boilers being denied their fuel. As for the millions of customers whose suppliers are going bust, Ofgem, the regulator, has a well established mechanism for ensuring that they won't be left with no power or gas at all. Instead, alternative suppliers will be force marched into taking them on.
That said, the procedure has yet to be tested in the case of multiple bankruptcies all at the same time. With wildly different IT systems and tariffs, this fast approaching prospect is going to be quite a challenge, to put it mildly.
I've written before about the madness of allowing the closure of the Rough gas storage facility off the East coast, and expecting the private sector to find and develop alternative storage capacity. This was never going to happen without government intervention, and it duly hasn't.
Yet Rough on its own wouldn't have saved us from the present spike in prices, which is as much an international affair as a UK specific one. According to the International Energy Agency, annual global investment in energy supply has fallen about 20pc as a result of the collapse in oil prices prompted by Saudi Arabia's market share land grab in combination with the early stages of the pandemic. That fall is already being felt in constrained production.
In many parts of the world, last winter was also unusually cold and long, resulting in a significant run down in strategy reserves. Recovery from Covid has meanwhile sparked an unexpectedly rapid rebound in demand.
But that's where the excuses stop, for the crisis has exposed deep flaws in Britain's "seat of the pants" energy market, together with a basic lack of preparedness and resilience.
Senior industry sources have been warning for years that the market was vulnerable to any rapid increase in prices, but were ignored. Sorry for the cliché, but what we are seeing today was an entirely avoidable accident waiting to happen.
Problem number one is the proliferation of undercapitalised "fly by night" suppliers. This was deliberately encouraged by ministers as a way of promoting as much competition as possible, and therefore seemingly guaranteeing the lowest possible prices. Consumers were urged to shop around for the best deals, regardless of the credit worthiness of the suppliers involved.
The rules were eventually tightened a little after criticism by the Competition and Markets Authority (CMA), but essentially very little consideration was given to the balance sheet strength of licensed participants. To qualify, all that was needed was a clean bankruptcy record and the payment of a £500 licence fee.
In one notorious case, an energy supply company was set up by a husband and wife team from their garage in Norfolk. As one industry insider remarks, it was easier to become an energy supply company than to open a bank account.
Many of these companies, though well-intentioned enough, were little more than a gamble on the possibility that wholesale gas prices would fall below the low tariffs being offered to attract customers from rivals.
We have seen much the same phenomenon in other sectors, broadband and banking among them, where there has been a similar attempt to beef up competition by encouraging "challenger" firms.
Hope springs eternal, but it has never worked. In all cases, the players end up consolidating down to just a handful. That's where the energy market is heading as well. The expectation is that the more than 50 suppliers we see today will eventually become fewer than 10.
Problem number two is that ministers have encouraged consumers to chase lower tariffs with the promise that there is no need to worry if the supplier goes bust; the customer will always be looked after. By insulating suppliers from the consequences of their actions, this has promoted a culture of high-risk tariff structures.
Forward hedging of prices for gas and electricity supply is never going to be easy for the smaller participants, but it has been particularly difficult since Theresa May went against the majority recommendation of the CMA by stealing Labour's clothes and introducing a price cap.
The price cap, a blatant piece of vote buying populism, is problem number three. There has been no good precedent internationally for price caps, yet the Government now trumpets the policy as the best way of protecting consumers from the spike in energy prices.
That's rich, given that it may partially have caused the problem in the first place. Inability to charge what wholesale prices demand is forcing lots of smaller players out of the market .
In any case, the short-term protection provided is limited. The price cap is regularly reviewed to take account of fluctuating wholesale prices. Already, fuel bills governed by the cap are scheduled to rise by an average 12.5pc in October .
Unless feeder prices rapidly fall in the meantime, which doesn't look likely given the onset of winter heating demand, bills will go up by at least that amount again in six months' time, when the cap is next reviewed.
And finally there is the decision to charge all environmental levies against bills rather than general taxation. These are estimated to have added around 25pc to average domestic and business energy bills, or around £10bn a year – not far short of the money being raised by the increase in national insurance.
If you are determined to go green, there could scarcely be a less progressive way of doing it than to put the onus on the prices charged by a privatised energy sector, where they are spread equally among customers whether rich or poor.
Like much else to do with the UK economy, the energy sector turns out to be peculiarly unresilient to external shocks. Do ministers intend to do anything about it? Not by the look of it. Boris Johnson had better just pray that it is a mild and windy winter. A cold and still one might yet floor him.
- IMF says Britain leaving the EU is a significant risk
- PPE: the Oxford degree that runs Britain
- Will George Osborne's productivity plan help make Britain a world-beater?
- John McDonnell vows Soviet takeover of industries that ‘would bankrupt Britain’ in first 100 days of PM Corbyn
- 10 ways Jeremy Corbyn will cripple Britain if Boris Johnson fails to win a majority tomorrow
- Brexit weekly briefing: Davis departure leaves May exposed
- Jeremy Corbyn will nationalize UK utilities in 100 days. 'Simply huge' changes loom if Labour wins the election
- NLNG Train 7 to create about 10,000 direct jobs in Nigeria — ES, NCDMB
- Boris’s Blundering Brilliance
- Orbiting Jupiter: my week with Emmanuel Macron
- Thursday’s Election Is Crucial – Only the Heartless or Brainless Can Vote Tory
- What Albanese could have said: we lied – Australian coalmines have no future
- PMQs and Nick Clegg press conference – politics live blog
- Full text of the 2019 Spending Review - what Sajid Javid just announced
- Emmanuel Macron in his own words (English)
- Narendra Modi and the new face of India
- The next prime minister will be Boris Johnson. What now? Our panel responds
- Labour has a once-in-a-generation opportunity, and the Tories know it
- Election 2019: Who are the Scots who won't vote?
- After Brexit, will 5G survive the age of the European empire?
Energy crisis exposes deep flaws in Britain’s ‘seat of the pants’ economy have 1270 words, post on www.telegraph.co.uk at September 22, 2021. This is cached page on Europe Breaking News. If you want remove this page, please contact us.